Article : SOCIAL AND TAX TREATMENT OF TRANSACTIONAL INDEMNITY IN EMPLOYMENT LAW
In Brief :
– PRESUMPTION OF RESIGNATION OF THE EMPLOYEE QUITTING HIS JOB
– Adoption of the law n° 2023-171, of March 9, 2023, containing various provisions adapting French labor law to European Union law
SOCIAL AND TAX TREATMENT OF TRANSACTIONAL INDEMNITY IN EMPLOYMENT LAW
In a decision dated February 14, 2023, the Administrative Court of Appeal of Paris has created confusion regarding the social and fiscal treatment of transactional indemnities paid following a dismissal.
In principle, the settlement indemnity supplementing the dismissal indemnity, if its purpose is to compensate for the effects of the termination of the contract, is not considered as an element of salary subject to social security contributions and is also exempted from income tax.
The social and fiscal treatment of the transactional indemnity accepted by the tax authorities is as follows:
– The settlement indemnity is exempt from income tax up to the highest of the following 3 limits (CGI, art. 80 duodecies 1, 3°):
- half of the total compensation paid, up to a limit of six annual social security ceilings in force on the date of payment;
- twice the gross annual remuneration received by the employee during the calendar year preceding the termination of the contract, up to a limit of six annual social security ceilings in force on the date of payment;
– the legal or conventional amount of the redundancy payment, without any limit.- The settlement indemnity is exempt from social security charges within the limit of the tax-exempt portion and two annual social security ceilings in force at the date of payment (CSS, art. L. 242-1), i.e. within the limit of €82,272 (PASS in 2022 equal to €41,136).
For the assessment of the limits, the redundancy and transactional indemnities must be added together.
In a decision dated February 14, 2023, the Administrative Court of Appeal of Paris (CAA) approved the tax administration’s adjustment of a settlement indemnity paid to an employee following her dismissal.
The employee had been dismissed on the grounds that her managerial methods were inappropriate.
The employee and her employer then entered into an agreement providing for a settlement indemnity in the amount of €60,000 to compensate for all of the damages that the employee claimed to have suffered as a result of the termination of her employment contract.
As the compensation did not exceed the above-mentioned ceilings, the employee did not declare this compensation.
However, the employee was subject to a tax reassessment, confirmed by the Administrative Court of Appeal.
The CAA justified its decision on the grounds that:
- It is up to the administration to find out how to qualify the sums that are the subject of the transaction;
- The transactional indemnity can be exempted provided that it can be assimilated to an indemnity for dismissal without real and serious cause;
- It is therefore up to the tax authorities and, when the matter is referred to them, to the tax judge, to verify whether the payment of the settlement indemnity is made on the basis of and following a dismissal without real and serious cause or not.
In this case, the Court considered that the dismissal could not be considered as being without real and serious cause and therefore the sums paid by way of a transaction cannot be qualified as a transactional indemnity.
The CAA’s decision is likely to have a significant impact on the practice of lawyers, employers and employees in negotiating settlements and drafting memoranda of understanding.
Indeed, the CAA of Paris assumes the competence to rule, at least implicitly, on the fact of knowing whether the dismissal is devoid of real and serious cause. However, by entering into a settlement agreement, the parties demonstrated their desire to avoid the uncertainty of a judicial decision on the merits of the dismissal.
Moreover, it is not within the jurisdiction of the administrative court to rule on the merits of a dismissal; this jurisdiction belongs to the Conseil de prud’hommes in first instance and to the Court of Appeal.
The decision of the CAA of Paris may cause confusion as to the tax and social security treatment of the transactional indemnity.
It is up to the lawyers to secure the transactions, in order to highlight, if necessary, the existence of a dismissal without real and serious cause, without recognizing the validity of the other party’s position. This is going to be a complex exercise.
PRESUMPTION OF RESIGNATION OF THE EMPLOYEE QUITTING HIS JOB
Law no. 2022-1598 of December 21, 2022 created an article L. 1237-1-1 of the Labor Code, which reads as follows
“An employee who has voluntarily abandoned his or her position and does not return to work after having been given formal notice to justify his or her absence and to return to his or her position, by registered letter or by letter delivered personally against a receipt, within the period set by the employer, shall be presumed to have resigned at the end of this period.”
This new provision establishes a simple presumption of resignation, to be borne by the employee.
In other words, an employee who no longer comes to work and who does not comply with his employer’s request to return to work (or to justify his absence), will be presumed to have resigned.
The employment contract is then terminated, with the consequences that follow for the employee of a resignation, in particular the absence of coverage by the “Pôle Emploi” (except in exceptional cases).
The employee may contest this presumption before the “Conseil de prud’hommes”.
This new provision is contrary to the jurisprudence of the Cour de cassation which applied until now.
Indeed, before the introduction of article L.1237-1-1 of the French Labor Code, the case law had established the following principle with regard to abandonment of post: “If the employer considers that the contract has been terminated by the employee, he must implement the dismissal procedure; otherwise, the termination is analyzed as a dismissal without real and serious cause” (Cass.soc.June 25, 2003 n°01-40.235 and n°01-41.150).
Thus, the established practice was for the employer to first give the employee formal notice to return to work and, in the absence of a response, to initiate the dismissal procedure.
From now on, the paradigm is reversed. It is therefore up to employers to integrate this new tool for managing job abandonment.
Adoption of Act No. 2023-171 of March 9, 2023, containing various provisions adapting French law to European Union law
Act 2023-171 of March 9, 2023 adjusts several provisions of the French Labor Code concerning family leave, the information to be provided to the employee concerning the employment relationship and the length of the trial period.
Among the changes made, we can note:
Elimination of longer trial periods provided for by branch agreements: revocation of the option for branch agreements to provide for trial periods longer than the legal maximum. From now on, the trial period may not exceed :
- Workers: 2 months, 4 months in case of renewal;
- ETAM: 3 months, 6 in case of renewal;
- Executives: 4 months, 8 in case of renewal.
Renewal must be provided for by an extended branch agreement.
This measure will only come into force after a period of six months following the promulgation of the law.
Implementing decrees will soon specify the terms and conditions of certain new obligations, in particular those relating to information for employees.